Punishing China No Boon for US Manufacturing Jobs

For every Apple iPad sold in the United States, the U.S. trade deficit with China increases by about $275.

Yet by far the most value embedded in the device accrues to Apple and sustains thousands of well-paid design, software, management and marketing jobs in the United States.

By contrast, the value captured in China by the laborers who assemble Apple's products is a mere $10 or so, according to researchers led by Kenneth Kraemer of the University of California, Irvine, who crunched the data.

Viewed through this prism, offshore manufacturing of electronic products like the iPad is a solution, not a problem, for the United States, and seeking to punish China for its purportedly undervalued exchange rate is wide of the mark.

"Without China, Apple couldn't be so successful and Apple products wouldn't be so affordable," said Yao Shujie, professor of economics at the University of Nottingham in England.

In the case of the iPad, China is the final assembly point for components imported from a host of countries, including South Korea, Japan, Taiwan, the European Union and the United States itself. There are no Chinese suppliers for the iPad.

"China is sitting in the middle: It's processing goods for rich countries," said Yao. As such, he argued, it would be more accurate to allocate most of China's bilateral "iPad trade surplus" to those supplier countries.

Kraemer agreed that trade data can mislead as much as inform.

Statistical agencies are working on more accurate breakdowns of the origins of traded goods by value added, which would be attributed based on the location of processing, not on the location of ownership, he said.

"This will eventually provide a clearer picture of who our trading partners really are, but, while this lengthy process unfolds, countries will still be arguing based on misleading data," Kraemer and fellow authors Greg Linden and Jason Dedrick said in a recent paper.

FOOTLOOSE MANUFACTURERS

Such economic niceties cut little ice with U.S. politicians. The Senate on Tuesday passed a bill aimed at getting China to raise the value of the yuan in an effort to save American jobs. The legislation now heads for the House of Representatives, where its fate is uncertain.

The bill would allow the U.S. government to slap duties on products from countries found to be subsidizing their exports by undervaluing their currencies.

Fred Bergsten, director of the Washington-based Peterson Institute for International Economics, reckons a $100 billion improvement in America's current account deficit would translate into 600,000 new jobs.

But Fredrik Erixon, director of the European Centre for International Political Economy, a think tank in Brussels, said America's trade deficit had deep demographic and other structural roots. As such, even a substantial rise in the yuan would lead to only a marginal increase in U.S. jobs.

"Multinational firms that think currency appreciation is going to have a big effect on their export capacity from China to the United States are going to shift to other countries, not to the United States," he said.

Indeed, manufacturers are already exiting low-margin sectors in response to the steady rise in the yuan — up 30 percent in nominal terms against the dollar since 2005 — plus fast-rising costs for labor, land, energy and other inputs.

Jonathan Anderson, chief emerging-markets economist for UBS in Hong Kong, said U.S. and EU trade data showed that China's share of total low-end light manufacturing imports had peaked over the last 24 months and was now falling outright in the United States.

Gaining at China's expense were its even cheaper neighbors, including Vietnam, Bangladesh and Indonesia, as well as Mexico, Anderson said.

Strikingly, while overall U.S. imports of apparel and furniture have continued to increase over the past two years, domestic American production has plummeted. Foreigners have gained, not lost, market share.

Anderson said it made perfect sense that U.S. workers were not the beneficiaries of rising Chinese wages.

"If $300 per month for a 65-plus hour work week is too rich for, say, basic toy manufacturers, do they go to the U.S. and pay $1,200/month plus benefits for a 40-hour week at the minimum wage or do they go to Bangladesh or Cambodia, where workers put in Chinese-style hours for less than $100/month?" he wrote in a recent report.

NO EASY FIX

Only by forcing a massive rise in the yuan or imposing implausibly high tariffs could such a cost gap be closed. The threat of trade and currency wars, which is likely to be a refrain at this weekend's meeting of Group of 20 finance ministers in Paris, could then well become a reality.

"The gradual concentration of electronics manufacturing in Asia over the past 30 years cannot be reversed in the short to medium term without undermining the relatively free flow of goods, capital, and people that provides the basis for the global economy," wrote Kraemer, Linden and Dedrick.

They said they did not want to imply that there was no hope for U.S. manufacturing. But it was design, computing and marketing, not snapping a molded plastic case in place, that created high-wage jobs. In any case, next-door Mexico could already handle final assembly at a relatively low cost.

"Bringing high-volume electronics assembly back to the U.S. is not the path to 'good jobs' or economic growth," they wrote.

For every Apple iPad sold in the United States, the U.S. trade deficit with China increases by about $275.
Yet by far the most value embedded in the device accrues to Apple and sustains thousands of well-paid design, software, management and marketing jobs in the United...